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Potential and pitfalls of applying theory to the practice of financial education.

Article Excerpt
Researchers are increasingly using interdisciplinary theory to bring rigor to the practice of financial education. Practitioners often do not see the value of the theory because it does not coincide with their observations of how people behave, and researchers do not yet have enough experience with interdisciplinary theory to demonstrate its usefulness to practitioners. If carefully applied, theory can be used to set appropriate financial goals and to positively change consumers' financial behaviors. Better communication can bridge the gap between theory and practice to the benefit of the consumer.

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As personal finance seeks to define and establish itself, researchers are increasingly using theory to bring rigor to the practice of financial education. Researchers sometimes find themselves at odds with practitioners who feel that theory is removed from their work or world. Practitioners often do not see the value of theory because they believe it does not coincide with anecdotal evidence from professional experience. And because of the interdisciplinary nature of the field, researchers are not yet comfortable enough with theory to effectively demonstrate its usefulness to practitioners. Unfortunately, the result is that practitioners fail to realize how theory has helped the work of financial education thus far, and what is often lost in the conflict is a dialogue on where we should go from here.

Campbell (2006) describes "positive household finance" as a study of how households do behave and "normative household finance" as a study of how households should behave. He surmises that, with a few modifications, standard finance theory can rationalize the behavior of most households and thereby resolve the discrepancy between actual and optimal behavior. However, some households still make "investment mistakes" because of which their actual behavior diverges significantly from what is optimal. Financial education can help such households resolve their mistakes. In other words, the link between theory and education is clear--normative financial theory defines the goal and financial education helps households who make mistakes change their behavior to reach that goal.

For the personal finance profession, the link between theory and financial education is not often this straightforward. First, because of its interdisciplinary nature, the profession has a number of theories from which to choose (e.g., Schuchardt et al. 2007). Second, while the tasks of financial education have been clearly identified as (1) defining financial success, (2) helping people change their behavior to achieve financial success, and (3) evaluating whether financial success has been achieved, the role of theory...

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